Dubai and Hawkamah to develop Corporate Governance Codes
DUBAI AND HAWKAMAH TO DEVELOP ACORPORATE GOVERNANCE CODENovember 2011In recent years, the government of Dubai has arrested and charged a number of seniorcorporate executives from financial and real estate firms in connection with allegations offraud and illegal financial transactions. With the office of Dubai’s Ruler, HH SheikhMohammed Bin Rashid Al Maktoum, issuing a warning that “there will be no tolerance shownto anybody who tries to exploit his position to make illegal profits,” corporate governance isbeing discussed with fervor among the business community in Dubai.While sound corporate governance has always been a concern in the region, it has becomeespecially crucial in the aftermath of the global financial crisis and the governmentscampaign against corporate malfeasance. With the U.A.E., specifically Dubai, emerging fromfinancial crisis, deficiencies in corporate governance have become even more exposed.Objectives promoting sound corporate governance policies and stable growth recentlyprompted the government of Dubai to engage Hawkamah – the regional institute forcorporate governance – to develop a corporate governance framework for small and mediumenterprises (SMEs). The relevant question to be asked here is: Why the code on corporategovernance is being developed specifically for SMEs in Dubai?Why is corporate governance crucial for SMEs?SMEs dominate Dubai’s corporate landscape. Given the lack of stringent regulationsapplicable to publicly listed companies, SMEs are prone to fraud and illegal transactions.Because SMEs are unlikely to be listed on organized stock exchanges, there is no organizedregulatory body monitoring their operations or enforcing conduct codes. Accordingly, theimplementation of a corporate governance regime becomes more complex and poses a newset of challenges, including ensuring transparency, disclosure, and respect for minorityshareholders’ rights.Factors in the Middle East such as family culture, the lack of transparency in the functioningof SMEs, the symbolic function of the administrative board, as well as the lack ofcommunication, all lead to mistrust and confusion. In response to these concerns, the
government of Dubai, together with Hawkamah, are making efforts to improve corporategovernance of SMEs involving the relationship and accountability between corporations andtheir stakeholders.Hawkamah and its core principles‘Hawkamah’ means corporate governance in Arabic. Hawkamah was launched in February2006 with the aim of advancing corporate governance practices in the Middle East, NorthAfrica, and Central Asia. The core objectives of Hawkamah are: to execute and improvecorporate governance within the SMEs involving issues of transparency, independentauditing, board responsibilities, and robust procedures. The following details theseobjectives. Appointment of independent directors: Appointing independent directors should ensurethat investors receive complete and accurate disclosures. The independent director shouldfocus on improving transparency; otherwise the board cannot add real value in terms ofgovernance.Responsibilities of the board: Boards have an important role to play within a company andthey should be responsible for strategically steering the company towards achieving its goalsin the most efficient and profitable manner. Boards need to understand that they can bepersonally liable for their wrongful acts, and it is crucial that the key control functions havedirect communication with the board so that the board can be armed with the information thatit needs to make decisions. Knowledge is power in terms of governance. If the board doesnot have a full understanding, and most importantly, if the board does not have unfetteredaccess to the information it needs to make decisions, then it cannot do its job.Improving transparency disclosure: Transparency issues in financial reports remain achallenge on a global scale, yet even more so in the Middle East. Clearly, the information tobe disclosed must be accurate, timely, and sufficient. Well-designed disclosure systemswould achieve this goal. However, especially under the civil law system, it has proven adifficult task despite that fact that the consequences of nondisclosure can include sanctionsthat range from criminal to civil to administrative.Cutting clutter from financial reporting: Transparency in reporting is not limited to theamount of information included in the reports but also includes the quality of that information.Information in financial reports that might be unnecessary, outdated, or misleading is referredto as “clutter.” Clutter in annual reports can be a problem, making it harder for users to
measure a company’s financial health. It is, therefore, Hawkamah’s agenda to educateorganizations in removing the clutter from financial reporting.Implementing internal control: A clear, unambiguous message that bribery, fraud, andillegal financial transactions will not be tolerated should be regularly communicated toemployees. Companies must establish an internal control system aimed at evaluating themethods and procedures for managing risk and implementing the procedures, as well ascompliance with relevant laws and regulations. A company must also appoint a complianceofficer to ensure compliance by the company and its employees of the relevant laws,regulations, and procedures affecting the company.Independent auditing: The independent auditor plays a critical role in corporate governanceby providing objective assessments regarding any organization’s governance structure.ConclusionDubai’s financial and economic development depends on good corporate governance inSMEs, such as defining board responsibilities, encouraging transparency and accountability,and providing financial disclosure. A commitment to sound corporate governance will benefitcompanies as it will undoubtedly attract more investor interest, thus providing an evengreater choice in sources of capital.